An auction is a process of buying and selling goods or services, which includes tangible and intangible assets that are referred to as “items”, by offering them up for a bid, taking bids and then selling the items(s) to a winning bidder. An auction may refer to any mechanism or set of trading rules for exchange of an item.
In this context, a “seller” is referred to as the person or organization that is offering the auctioned item and a “bidder”is referred to as the person or organization that places a bid. The winning bidder is often called a buyer as in return for the item money or any other item is given to the seller. Of course, the winning bid, i.e. the price which is offered in return for the auctioned item, may be any tangible, e.g. paper money, or intangible item of value which includes various services.
U.S. Pat. No. 3,581,072 describes an early computer driven auction-matching system for goods. This reference discloses an pricing system where priced orders to buy are arranged in descending order by price and priced orders to sell are also arranged in descending order by price within each price range, with all orders being arranged in descending order by time of placement so the older orders are upper most. Further, all compatibility prices orders are then matched starting with the highest price order to buy and the lowest price order to sell and proceeding sequentially until all compatibility priced pairs of orders have been matched. Ordering and matching types of actions are performed efficiently by computers with the outcome being controlled by pre-stored rule sets which designates the variable (the price) to be optimized.
Today several auction platforms are available on the Internet, e.g. via Ebay, Yahoo, Amazon and Bid.com. These online auction platforms in fact have no similarity with the traditional auctions in which an auction items is announced for bidding in front of a group of bidders in real time. These online auction sites act more or less as a broker that lists all kinds of auctions items for bidding for a fixed period of time. The broker takes a cut from the bidding price after one of the auction items is sold.
There are a number of disadvantages in such online auctions. First, there are no more person-to-person interactions, everything is done through a proxy server, i.e. the broker server, lacking a convenient possibility for the seller and a bidder to meet and establish trust for ensuring that the bidder is serious. Second, often an auction item could not be appreciated by the bidder and it is possible that the items is worth less than it appears to be worth.
As a result, online auctions are prone to fraud, in particularly when the social distance between the seller and the bidder is large, i.e. a person will most likely not defraud know persons while unknown persona re more likely to be subjected to fraud. Hence, today a challenge lies in implementing an online auction system which reduces the risk of fraud by taking a social distance between a seller and a bidder into account.